A Comparative Study of Fertilizer Credit in Bangladesh
Fertilizer is an input that requires time to generate returns. There is a need of a financial institution to finance credit to fund this production lag. This paper analyzes the situation in Bangladesh and offers some recommendations.
The major role of the Fertilizer Distribution Improvement Project (FDI), that started in 1978 in Bangladesh, was to provide bank support to expand private trade credit financing for fertilizers. It routed the resources through Bangladesh Agricultural Development Corporation (BADC) and later on through the central bank of Bangladesh. The funds were used to rediscount fertilizer loans made by commercial banks, resulting in the expansion of commercial credit availability for fertilizer trading. Nearly half of the banking sector in Bangladesh was involved in this program.
A model was created to test the hypothesis that trade credit is dependent on access to bank credit and other explanatory variables. The variables used were:
- Access to bank credit;
- Rate of interest on loans;
- Requirement of down payment;
- Quality of trade relationships;
- Number of traders.
The major finding was that availability of bank credit did increase the availability of trade credit in a substantial way.
The paper recommends:
- Introducing variable lending interest rates proportionate to the risk;
- Countering money diversion methods;
- Increasing security pledging;
- Revaluating the practice of renewing loans without full adjustment of the outstanding balance.
